State banking group First Citizens will be reducing its TT dollar prime lending rate by 0.25 per cent, effective November 1.
In a press advertisement, the bank announced the rate change from 7.75 per cent to 7.50 per cent.
It is expected that other financial institutions will follow suit in reducing prime lending rates.
At least one other major commercial bank has confirmed its intention to do so, but not when or by how much.
The prime lending rate is the interest rate commercial banks charge their most credit-worthy customers. Generally, a bank's best customers comprise large corporations. Default risk is what mainly determines the interest rate a bank will charge a borrower. Because a bank's best customers have little chance of defaulting, the bank can charge them a rate that is lower than the rate that would be charged to a customer who has a higher likelihood of defaulting on a loan.
The prime interest rate, or prime lending rate, is largely determined by the overnight ("repo") rate, or the interest rate at which a depository institution (like the Central Bank) lends immediately available funds (balances within the Central Bank) to another depository institution overnight. This provides for an efficient method whereby banks can access short-term financing from Central Bank depositories. As the overnight rate is influenced by the Central Bank, it is a good gauge for the movement of short-term interest rates.
Domestic interest rates have been decreasing over the last few years because of sluggish economic growth which has led to little borrowing activity at financial institutions.
In its inflation bulletin last month, the Central Bank announced it was reducing the repo rate from three per cent to 2.75 per cent to support sustained economic recovery because of "dampened consumer and business confidence".
The prime rate is also important for retail customers, as the prime rate directly affects lending rates which are available for mortgages, small businesses and personal loans. —Carla Bridglal